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Hello and welcome back to MarketWatch’s Extra Credit column, a weekly look at the news through the lens of debt.
This week we’re talking about hope for student loan borrowers in bankruptcy and the ubiquity of medical debt. But first up, the Olympics debt trap.
Are the Olympics a debt trap for the host city?
All eyes will be on Tokyo on Friday for the opening ceremony of arguably the most unusual Olympic games in history. But even a typical Olympics — with fans and sans COVID protocols — can land their host cities in sometimes insurmountable debt.
“It pretty much automatically entails issuing a fairly significant amount of debt,” Victor Matheson, an economics professor at College of the Holy Cross, said of hosting the Olympics. “You can’t pay for the venues, you can’t pay for the security, you can’t pay for all of that in just what you’re collecting in terms of tickets and sponsorship.”
Research from Matheson, who studies sports economics, and his co-author Robert Baade, suggests that in most cases host cities lose money on the Olympics. There are a few reasons why that’s the case. For one, cities compete for the privilege of hosting by promising the International Olympic Committee that they’ll build the best facilities.
“That causes this runaway arms race,” Matheson said.
Those facilities often need to be built relatively quickly, which can push up the costs, he said. Corruption and the desire to upgrade — similar to getting sold on the more expensive marble countertop for your kitchen — also mean that the actual cost of hosting the Olympics often exceeds initial estimates. Between 1968 and 2012, the median Olympic games was 150% over budget, according to Matheson’s research.
In exchange for footing the bill for sports complexes, hotels and more, the host cities collect ticket and tourism revenue as well as funds from domestic sponsorship and local licensing deals. But the IOC gets the bulk of the lucrative broadcast rights — without shelling out for the costs.
In some cases, the mismatch between cost and revenue for Olympic host cities has led to devastating consequences. In Montreal, the money borrowed to build an Olympic stadium for the 1976 games — dubbed the Big Owe — wasn’t paid off until 2006. In Athens, the cost of the 2004 Olympics has been associated with the Greek debt crisis, although of course many other factors contributed.
There are some cases where the Olympics’ promise of bringing glory to a city has been fulfilled. For example, the 1984 Olympics were a boon to Los Angeles in large part because the city was the only bidder and so didn’t have to vow to build new facilities, Matheson said. Instead, the city used already existing stadiums, including ones used for the 1932 Olympics.
Given the lack of fans and extra preparation required for COVID-19, it appears unlikely that the Olympics — which according to official estimates will cost $15.4 billion — will be a boon for Tokyo. Still, given that Japan has one of the largest economies in the world, it probably won’t be a huge problem, Matheson said.
Hope for student loan borrowers in bankruptcy
For decades, the conventional wisdom surrounding student debt was that it’s impossible to get rid of that debt by declaring bankruptcy. Over the past few years, lawyers have started to challenge that notion and judges are coming around. Recent news suggests the pathways to having student debt discharged in bankruptcy are opening up.
Late last week, an appeals court ruled that a specific type of private student loan could be discharged in bankruptcy. The decision came as part of a lawsuit filed by Hilal Homaidan accusing Navient
NAVI,
of illegally collecting on $12,567 in private loans he’d borrowed from Sallie Mae, Navient’s corporate predecessor, after he’d filed for bankruptcy.
Under the bankruptcy code, there are four categories of student loans exempt from discharge: Those that were made by the government, those that were made by nonprofit organizations, any other type of loan that covers qualified educational expenses — essentially a private loan that’s for up to the cost of attendance at an accredited school — and an obligation to repay funds received as an educational benefit, stipend or scholarship.
The $12,567 Homaidan borrowed from Sallie Mae were not made to cover cost of attendance and they went directly to his bank account, not through his school’s financial aid office, according to court documents. That meant, his lawyers argued, that the loans didn’t fit into any of the categories exempt from discharge in bankruptcy.
Navient pushed back, arguing the loans fit into the educational benefit category. But the appeals court sided with Homaidan — the third to do so — saying that the educational benefit portion of the statute refers to specific programs that require an obligation from a student, say to serve in the military, in exchange for tuition funds up front. “It’s very significant,” said Jason Iuliano, an associate professor of law at the University of Utah. “Now you have three cases that have said these types of student loans are dischargeable.”
“They’re really not going to be allowed to keep trying to make this argument,” added Austin Smith, one of Homaidan’s lawyers, in reference to Navient.
Paul Hartwick, a Navient spokesman, wrote in an emailed statement that the appeal related to only one issue in the case. The company asserted multiple defenses and “looks forward” to presenting its other defenses as the case proceeds, he said. “For several years, Navient has recommended bankruptcy reform that would allow federal and private student loans to be dischargeable in bankruptcy after making a good-faith effort to repay,” Hartwick wrote.
That decision applies to a relatively small share of the overall student loan portfolio. But a new paper argues that more could be done to improve the odds of discharge for the largest group of borrowers — those with federal student debt.
Borrowers with student loans that do fit into the categories exempted from discharge have to prove the debt is causing them an undue hardship for it to be wiped out in bankruptcy. Historically that’s meant showing, among other things, what’s called a “certainty of hopelessness” or that they’d never be able to repay the debt in the future.
In recent years, judges have been shifting away from that standard. Now, a law review essay, authored by a bankruptcy law expert and two former staffers in the Department of Education’s Office of General Counsel, is arguing the Department of Education should too. When borrowers with federal student loans in bankruptcy seek to have those debts discharged, the Department, as the loan’s creditor, often pushes back, nitpicking borrowers’ finances to prove there is (or will be) room in their budget to repay the loan, the authors of the essay write.
As an example, the essay cites one case in which the agency contended that a grandmother with $73,000 in student debt working over 50 hours a week at two jobs to support herself and her autistic grandson exaggerated her food budget because she said she accepted donated food and contested her medical expenses because she didn’t produce receipts.
The essay suggests the Department implement a policy of not contesting when borrowers try to discharge their debt in bankruptcy or create decision criteria to decide when it makes sense to contest. For example, the agency would decide not to contest if Social Security benefits account for at least 50% of a borrower’s income.
“There is all this authority that the Department of Education has irrespective of legislative changes to change the way they approach this and to help people who are filing for bankruptcy right now,” said Aaron Ament, one of the authors of the essay and the president of the National Student Legal Defense Network, which represents student loan borrowers in litigation. “There’s a huge opportunity to help a lot of people that are really facing dire circumstances.”
The Department didn’t provide a comment by press time, but earlier this week, an agency spokesperson told The Washington Post that the Department has agreed “to any stay of proceedings requested by the plaintiff in bankruptcy actions at least through the end of the pause on student loan payments.”
Medical debt — a universal American experience
The largest source of debt in collections is a bill borrowers never asked to take on and likely didn’t know the cost of in advance. That’s one takeaway from research published in the Journal of the American Medical Association this week, which finds that 17.8% of Americans had medical debt in collections in 2020.
The findings illustrate the ubiquity of the problem, said Raymond Kluender, an assistant professor at Harvard Business School and one of the authors of the research.
“Medical debt has been a big problem for a long time and that’s attributable to our patchwork health insurance system in the U.S.,” he said.
Indeed, the study found that in states where lawmakers expanded Medicaid as part of the Affordable Care Act, the mean medical debt decreased by 44% between 2013 and 2020. But in states that didn’t expand the program, mean medical debt stayed at 90% of its 2013 levels. What’s more, many of the states with the highest levels of medical debt before Obamacare chose not to expand Medicaid, creating a “a poor get poorer, rich get richer” dynamic, Kluender said.
